Economy
Tony Dejak  /  AP
In this photo workers build a new commercial building in Warrensville Heights, Ohio. The economy grew at a 2.8 percent pace last quarter, as the recovery got off to a slower start than first thought.
updated 11/24/2009 2:15:00 PM ET 2009-11-24T19:15:00

The economy is growing modestly, with consumers too wary about spending to invigorate the recovery.

That's the picture that emerged from reports Tuesday on the economy and the confidence of consumers, who power 70 percent of it.

Unemployment and tight credit have sapped shoppers' willingness and ability to spend freely as retailers enter their crucial holiday season. And Americans are expected to grow more cautious about spending next year. That would make for a plodding recovery.

The economy grew at a 2.8 percent rate last quarter. Forecasts for the current quarter are for similarly lackluster growth before a drop-off next year.

"It's hardly a rip-roaring recovery," said Stuart Hoffman, chief economist at PNC Financial Services. "Usually coming out of a recession you get growth more like a rodeo bull — at a pace of 6 or 7 percent in the early quarters of recovery. That isn't happening. It is coming out of the stalls more like a fat cow."

The Commerce Department's revised estimate of gross domestic product for July through September was less than the 3.5 percent growth rate foreseen just a month ago. And the estimate for GDP — the value of goods and services produced in the United States — was a tad less than the 2.9 percent growth rate that economists surveyed by Thomson Reuters had expected.

The main factors behind the downgrade: Consumers didn't spend as much. Commercial construction weakened. And imports exerted more of a drag on the economy. Businesses also trimmed more of their stockpiles, further restraining growth.

At the same time, the Conference Board's latest survey of consumer confidence found gloom among shoppers.

"I really won't be spending money on Christmas," said Ivan Horne, 47, of Tampa, Fla., who has been out of work for about a year. "I'm barely able to make enough to survive."

An Associated Press-GfK poll released this week found that 93 percent of Americans say they'll spend less this holiday season or about the same as last year.

Also Tuesday, the Standard & Poor's/Case-Shiller home price index of 20 major cities suggested that the summer's trend of rising home prices is slowing. And analysts expect prices to dip again this winter as foreclosures rise.

The tepid reading on economic growth and consumer confidence caused stocks to retreat from their 13-month highs. The Dow Jones industrial and other stock averages were down slightly in early-afternoon trading.

Over the past few months, though, the stock market has surged. A rally on Monday carried the Dow up 133 points to its highest point in just over a year.

In part, stocks have been powered by a weak dollar and low interest rates. Lower rates let companies and investors borrow cheaply. They also cause some to shift money out of cash and bonds and into investments that promise higher returns, such as stocks.

Stocks also have benefited from higher corporate profits. Companies have managed to squeeze out more profits without the cost of higher production or payrolls. They've done so by boosting their workers' productivity and drawing down their existing stockpiles of goods.

Major Market Indices

The GDP report showed the economy finally started to grow again from July through September, after a record four straight losing quarters. But growth probably won't be strong enough to quickly drive down the nation's unemployment rate, now at 10.2 percent. Some analysts think the rate could climb as high as 11 percent by mid-2010 before slowly declining. It could take at least four years for it to drop back down to more normal levels.

For the current quarter, some analysts think economic growth will slow to around a 2.5 percent pace, but it could hit a pace of around 3 percent if holiday sales turn out better than expected.

Though cautious, consumers are holding up despite high personal debt, a tight job market and hard-to-get credit. A government report out Wednesday is expected to show that consumer spending rose 0.5 percent in October, compared with a 0.5 percent drop in September. Incomes, the fuel for future spending, are expected to edge up 0.2 percent, after being flat.

If that report meets or exceeds forecasts, it would signal that consumer spending began the final quarter of this year on a solid note. If it comes in weaker, fears of a possible "double-dip" recession could be revived.

Many say they think the economy will weaken again next year. Some project growth at a pace of around 1 percent as the benefits of the $787 billion stimulus package fade and consumers keep tightening.

"I think when the bills come in January, you'll see consumers pull back," said Brian Bethune, economist at IHS Global Insight. "It's going to be a slow-motion recovery. But it is still better than not having any forward motion at all."

Much of the economy's return to growth last quarter reflected federal support for spending on homes and cars. But some of it was less than initially thought.

Spending on homes and other residential projects, for example, soared at an annualized pace of 19.5 percent, but slower than the 23.4 percent rate first estimated. Spending on big-ticket "durable" goods — including cars — jumped at a pace of 20.1 percent, down from 22.3 percent. Still, such spending grew after falling in the previous quarter.

In the third quarter, the Cash for Clunkers rebates and an $8,000 tax credit for first-time homebuyers juiced up sales of cars and homes. The clunkers program ended in August. But the tax credit has been extended and expanded beyond first-time buyers.

It's unclear whether the recovery can endure after government supports are gone. If consumers clam up, the economy could tip back into recession.

Tuesday's report showed that consumer spending grew at a pace of 2.9 percent last quarter. That was down from a 3.4 percent growth rate first estimated, though it marked the best showing since early 2007.

Companies cut back spending on commercial construction — a weak spot in the economy — at a 15.1 percent annualized pace. That was deeper than the 9 percent initially estimated.

Businesses trimmed their stockpiles of goods by $133.4 billion last quarter, slightly more than initially estimated.

And the trade deficit ended up shaving 0.83 percentage point off GDP last quarter, more than first thought.

The government makes three estimates of economic activity for a given quarter. Each is based on more complete data. Tuesday's was the second reading of the third-quarter GDP data.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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